Income Insights: Understanding Tax-Equivalent Yield
Income Insights is a series designed to quickly describe important income tax concepts for advisors and their clients.

Understanding Tax-Equivalent Yield
When comparing bonds, be sure to evaluate yields on a tax-equivalent basis to consider the impact of taxes on after-tax returns. Here we look at the tax-equivalent yield using a hypothetical scenario.
These married taxpayers—who file jointly—reside in Arizona and earn a combined $450,000 per year. Their federal marginal tax rate is 32%, and they’re subject to the Net Investment Income surtax of 3.8%. They also pay a state tax of 2.5%, with a combined federal and state marginal tax rate of 38.3%. For this example, we assume an in-state municipal bond yield of 3.28%.
The formula for calculating tax-equivalent yield is:
Below is how the tax-equivalent yield would be calculated for our hypothetical couple, comparing four types of bonds.
For this couple, a corporate bond must yield 5.32% to produce an after-tax yield equivalent to the in-state municipal bond yielding 3.28%. This hypothetical example highlights how taxes can affect investment returns and the importance of making informed decisions to maximize after-tax income.
Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations.
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